ALCO Meetings (Part 3 of 3 Parts)

The final four ALCO meeting of the year can be used to review the Peer Report to observe your bank's performance compared to other banks of similar asset size. This comparative analysis is useful when looking for industry trends and to make sure that your risk management policies are realistic. Remember that the Peer Report comes at the end of each quarter after every bank in the country's data has been modeled using the A/L Benchmarks model. The PeerReport does not come at the same time as your other A/L Benchmarks report(s).

The data in your Peer Report is taken from the Industry Report, available online at http://blogs.olsonresearch.com/. The Industry Report is a sample of commercial banks representing 50 states, the District of Columbia and other territories. Some definitions that are helpful when reviewing the Peer Report:

1) Mean is a statistical mean of the sampled group, the sum of a group or sample of values divided by the number of observations in the group or sample.

2) Standard Deviation is the statistical measure of variance from the mean representing the dispersion of data (distance) from the mean.

The Standard Deviation reported in the Peer Report is one standard deviation from the mean which encompasses the middle 60% of all banks. The highest 20% and the lowest 20% have been excluded. For example, if the Mean for the ROA measurement is .78 and the standard deviation is .86, then 60% of all banks fall between -0.08 and 1.64 (0.78 +/- 0.86).

3) The High, Median and Low numbers are exactly that, the highest, the median and the lowest bank in the peer sampling.

Again from the perspective of of your bank compared to banks of similar asset size, thoroughly analyze the earnings performance, balance sheet mix, capital adequacy, asset quality, liquidity and interest rate risk in your institution. Discussion should include (but is definitely not limited to):

Earnings

Are changes in ROA, ROE and NIM consistent with industry trends? (Compare to the previous quarter and/or year.)

Are changes in ROA, ROE and NIM related to changes in yield, cost of funds or both?

What does the bank's overhead look like in relation to peers?

Is the bank trend in overhead consistent with trends in the industry?

Is the bank in compliance with internal risk management policies? Are these policies appropriate?

Balance Sheet Mix

How does your bank compare in terms of composition to your peers?

When looking at the differences in asset mix between your bank and peer banks, what affect would you expect to see in terms of earnings? Does this seem to be consistent with your theory?

How do differences in funding mix affect your cost structure? What steps are available for you to take to minimize your cost of funds?

Is the bank in compliance with internal risk management policies? Are these policies appropriate?

Capital Adequacy

First and foremost, is your capital within regulatory guidelines?

What is the trend for your capital levels?

Is your capital within the bank's risk management policies?

Asset Quality

What is the current level of Non-Performing Assets in relation to the level of ALL? How has this relationship changed over time?

What is the anticipated level of both Non-Performing Assets and potential Charge-Offs?

What additional Provisions will be necessary to cover Non-performing Assets and Charge-Offs? Discuss the impact on earnings.

What are the bank's premium levels in relation to peers?

Is the bank in compliance with internal risk management policies? Are these policies appropriate?

Liquidity

How does your bank compare in terms of asset liquidity?

How does your bank compare in terms of funding liquidity?

Identify your contingent sources of funding. Compare the cost of these contingency plans to the cost of generating core deposits.

Are there any imbedded options in your FHLB credits and under which interest rate environment will these options likely be exercised? How will this affect your earnings?

If all contingent sources of funding are currently being utilized, what are your alternatives if these avenues are no longer available?

Are all non-pledged securities marketable?

Is the bank in compliance with internal risk management policies? Are these policies appropriate?

Interest Rate Risk

What is the direction and magnitude of your Net Interest Earnings at Risk? How does this compare to your peers?

What is the direction and magnitude of your Economic Value of Equity at Risk (EVE)? How does this compare to your peers?

Have you consciously taken on some longer term risk to EVE in order to minimize shorter term risk to earnings or vice versa?

What is the likelihood, given the current rate environment, that this worst case scenario will play out?

Can you identify where the risk is coming from to both earnings and economic value of equity (EVE)? Are you being appropriately compensated for this risk?

What steps can you take to minimize the current risk to earnings and economic value of equity (EVE)?

Is the bank in compliance with internal risk management policies? Are these policies appropriate?

Additionally, you can take a look at your institution from the Regulatory perspective. Both the FDIC and the OCC have established some benchmarks for both bank performance and risk tolerance. The Canary Report is used by both institutions to determine which banks and what areas within the bank warrant a closer examination. You can find the Canary Report on the back page (page 4) of the Peer Report. Again, Canary ratios have been calculated for all banks in the country as well as the District of Columbia and other territories. The benchmarks in the Canary ratios, as defined by the OCC, are not individuated by asset size.

This concludes our series on ALCO meetings. It is our goal to assist you in making your monthly ALCO meetings as productive, and ultimately profitable, as possible.